Lack of upside followthrough dulls bullish reversal

Kevin Pendley | Sep 26, 2008 5:26pm EDT | Comment

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Small-cap stocks were unable to build on the amazing bullish reversal from two weeks ago and closed well below opening levels on weekly charts, suggesting that the manic rally earlier this month might have been more about squeezing out weak bears than it was about a true impending breakout move.

Once again we find the Russell 2000 (NYSE:IWM) back in a range, and just as quickly as the market challenged move-highs last week, this time around the index is back toward the lower portion of the range. As you can see on weekly studies, the Russell is basically biding time between 690 on the downside and 750 on the upside. Until we see a decisive breakout move above that zone, there is little reason to favor the bullish side of the argument – especially after last week’s big bullish reversal apparently had no teeth.

From a pattern perspective, the dominant chart formations remain bearish in nature, especially if you are willing to ignore last week’s upside push as an anomaly. Although I prefer not to ascribe subjective interpretations to chart patterns, the extreme volatility, wacky news, and - most important – the quick failure off last week’s bullish reversal make it more difficult to embrace.

Looking ahead to the coming week’s action, I am STILL watching 692 as a key downside point of reference. Decisive action below that point would suggest that rallies off the summer lows were corrective in nature and not bottom forming. On the upside, the key point of interest is really still back up at 750 and beyond, but in the interim, 717.50 through 720.50 stands as a decent test to see if the market can absorb selling interest.

The table below contains support and resistance points for the Russell 2000 to keep in mind heading into the week’s trading. For long-term traders, some of these key levels may remain in place for weeks...even months at a time. Those with a short-term horizon will lean toward levels that are more immediately in play. As time passes, we will build upon this table with levels that come into focus as important testing zones for trend analysis, and to act as road mark indicators for key reversal patterns.

From a trading perspective, I always keep a printout handy each day of my key support and resistance points for any stock or market I’m trading. It helps remind me of key areas to watch for signs of trend exhaustion, and also for potential entry/exit points for trades.

TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000

- 890.16   upward channel resistance on monthly charts off 5-year run;
            also fits with potential upside breakout of congestion zone
- 860.00   projected “figure” resistance off 15-handle testing zones on the ’06 rally
- 856.48   record intraday high set July 13
- 855.77   July 13 close; record high daily and weekly close
- 852.06   Oct. 11 high; bearish reversal peak on daily charts
- 830.01   previous high from the February 2007 peak; key swing line of note
- 815.00   key swing line
- 801.00   congestion resistance zone from November-December 2006
- 775.03   61.8% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse
- 764.38   new move high set August 15, 2008; approximate double top with June ‘08
- 762.89   previous move high set June 5, 2008
- 760.06   March correction low; key approximate double bottom formation support;
            Near 50% Fibonacci of July ’06-’07 bull run; violated in November ’07;
            Key swingline to watch
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
- 726.19   previous double top in June/July 2008
- 720.50   recent trading range swing point
- 719.93   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 717.31   20-day moving average
> 704.80   September 26 close
- 700.00   “figure” swing line; no monthly close below here since Dec ’05 until Feb ‘08
- 692.08   61.8% Fibonacci retracement of the July-August rally
- 685.00   20% decline off 2007 record highs; breached Jan. 2008 and July 2008
- 680.94   mild reversal low on daily charts Jan. 28; near 50% of the March ’08 bounce
- 668.58   July 2006 low; important bottom for summer correction
- 660.00   short-term downside target on wedge breakout; support zone
- 650.00   previous bear market move low set Jan. 22, 2008, critical support zone
- 647.37   July 15 2008 low; approximate triple bottom with Jan ’08; Mar ‘08
- 643.28   recent move low set Mar. 10, 2008
- 614.76   October 2005 bottom; next major chart related downside point
- 591.00   50% Fibonacci retracement of the 2002-2007 bull market run

In addition to the printout of support and resistance points to watch, I also like to keep in mind where sudden volatility can spring into the trading mix from the typical release of economic data and Federal Reserve activity.

The economic calendar is jam-packed with important releases, and they’ll all take a back seat to whatever happens with the financial rescue plan. That said, Friday’s jobs report might still pack some fireworks, and I think it’s always important to see where the market stands after a week of key events.

The table below highlights calendar event risk for the week, with the emphasis on various economic reports. Our table below has a special “Risk Factor” designation, which is simply my assignment of risk to that event, ranging from 0 to 5, with 5 marking the highest risk for volatile market swings.

CALENDAR EVENT RISK ASSESSMENT

RISK FACTOR REPORT/ITEM (all times Eastern) Consensus

1           Personal Income (Mon., 8:30 a.m.)                            0.2%
1           Fed’s Hoenig on econ and policy (Mon., 9:45 p.m.)
2           Chicago Purchasing Survey (Tues., 9:45 a.m.)             54.0%
3           Consumer Confidence (Tues., 10:00 a.m.)                  55.0%
2           Fed’s Lockhart on the econ outlook (Tues., 1:00 p.m.)
3           ISM Manufacturing Survey (Wed., 10:00 a.m.)             49.8%
0           Construction Spending (Wed., 10:00 a.m.)                    -0.5%
1           Vehicle Sales (Wed., all day)                                   13.5 mln
4           Weekly Claims (Thurs., 8:30 a.m.)                             468,000
1           Factory Orders (Thurs., 10:00 a.m.)                          -2.0%
0           Fed’s Evans on ag market conf. (Thurs., 1:00 p.m.)
0           Fed’s Bullard speech TBA (Thurs., 9:00 p.m.)
0           Fed’s Hoenig on econ and policy (Thurs., 9:45 p.m.)
5           Employment Report (Fri., 8:30 a.m.)                        -100,000
               -- Unemployment rate --                                      6.1%
3           ISM Non-Manufacturing Survey (Fri., 10:00 a.m.)         50.0%